Op-Ed, Commercial Real Estate, Bay Area
greg fogg
TenantSee Weekly: Knowing Your When

We see a lot of confusion in the market around when to begin negotiations.  It’s not an insignificant consideration.  In fact, when you begin can make a huge difference in the outcome.  It’s understandable that tenants would not know when to start.  Brokers are not always keen to start at the right time, since compensation is derived by transacting and the closer the tenant is to lease expiration, the faster it will need to transact (and the fewer options it will have).  Good for the broker, bad for the tenant.  This creates a misalignment of interests that discourages thoughtful consultation on the front end – the more time a broker spends on a project, the lower the compensation. 

TenantSee Weekly: Knowing Your When
Op-Ed, Commercial Real Estate, Bay Area
greg fogg
TenantSee Weeky: A Big Decline in Rents, Four ...

Throughout 2020, the prevailing sentiment among investors in the San Francisco office market was one of relative optimism.  After all, despite the fact tenants were prohibited from occupying their buildings, they continued to collect full rent.  The buildings were full, with vacancy hovering around 4%.  Sure, companies weren’t happy about paying for space they couldn’t use, but business was good.  In many cases the tech sector (which makes up most of San Francisco’s office occupancy) was booming due to an even greater reliance on and usage of tech caused by pandemic driven changes in how people were living.  Throughout the course of 2020 there was no reason for San Francisco investors to panic, as few (if any) office occupiers were showing signs of developing long-term hybrid or remote-first strategies.  Most were simply focused on solving for ongoing operations as a temporary reaction to the pandemic.  Yet early indicators did point to a future in which companies would be shedding office space, as some expiring leases were not replaced.  This, coupled with the addition of new supply, caused a big increase in vacancy to nearly 12% by year end.  Despite this large uptick, the brunt of the sluggish demand dynamic was being felt in the sublease markets, where rental economics more accurately reflected the true state of the market.  Despite a total closing of the office market in 2020, average asking rents ended the year off just 6% from the pre-pandemic high.

TenantSee Weeky: A Big Decline in Rents, Four Years in the Making
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: Modern Workplace Planning: ...

In the years leading up to the pandemic, most medium and small companies defined their office space need based on headcount (current and projected), space programming, and industry/sector norms.  The exercise was mostly formulaic.  The primary differences in the offices of a small, regional law firm compared to those of an AM Law 100 firm would be scale, the cost of finishes, and the quality of the building and views.  It was planning for the same outcome, just at different levels on the cost spectrum.  Companies having a larger portfolio of offices would typically create a “workplace strategy” that included guidelines around programming (e.g., space layout, office size, critical adjacencies, growth factor, finishes, FF&E, etc.).  These guidelines could then be used to inform the real estate process across geography.

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part I: The Purpose
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: This, or That?

Negotiations are always about (or should always be about) this or that.  There’s always something else, maybe that something else is nothing (as in sometimes the best thing to do is nothing at all).  Decisions made without proper consideration of all relevant alternative scenarios are decisions made poorly.  As important, in the context of office lease negotiations, the best negotiated outcomes are directly correlated to the extent to which we understand the alternatives of the landlord counterparty.  This is a bit counter intuitive, allow us to explain. 

TenantSee Weekly: This, or That?
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: I Digress...

A little AI distraction to cheer your day (and relieve us of yet another discussion about workplace). Ever wandered through the streets and felt like you've stepped into the future? With their undeniable presence here in San Francisco, the driverless car is quickly becoming the most prominent representation of AI in our daily lives. If you spend any time in San Francisco neighborhoods, you can’t miss them. The other day, as I chatted with a neighbor, I counted 6 autonomous vehicles casually cruise by our front door within a span of 10 minutes. Intriguing, right? And today, in a twist of irony, I was held up by one. Blocked by a double-parked UPS truck, the driverless car hesitated, unsure about navigating into the lane of oncoming traffic. Of course, all the drivers in the opposing lane weren’t too keen to make space for the driverless car, as one normally would (or at least the more decent among us would) for a human-driven vehicle. Hence, we waited.

TenantSee Weekly: I Digress...

#modernworkplaceplanning

, ,

TenantSee Weekly: Knowing Your When

, ,
TenantSee Weekly: Knowing Your When

We see a lot of confusion in the market around when to begin negotiations.  It’s not an insignificant consideration.  In fact, when you begin can make a huge difference in the outcome.  It’s understandable that tenants would not know when to start.  Brokers are not always keen to start at the right time, since compensation is derived by transacting and the closer the tenant is to lease expiration, the faster it will need to transact (and the fewer options it will have).  Good for the broker, bad for the tenant.  This creates a misalignment of interests that discourages thoughtful consultation on the front end – the more time a broker spends on a project, the lower the compensation. 

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VII: Design and Construction

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VII: Design and Construction

One common mistake tenants and their advisors make when negotiating the office lease is failure to properly account for design and construction implications.  These are important considerations.  Space design plays a vital role in determining the efficacy of the space, how it translates in terms of value to the employees.  Construction is expensive, representing a material component of the tenant’s total occupancy cost.  Gaining understanding about design and construction at the right time in the transaction process provides useful data in the context of effective negotiations.

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VI: Negotiating the Lease

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VI: Negotiating the Lease

Leases vary by building, by market, and by market circumstances.  In most major metros, when dealing with larger buildings, the lease document is sophisticated and complex, addressing a broad range of variables that will have a material impact on the occupier’s experience at the building, as well as its cost of occupancy.  If you’ve done a good job negotiating the letter of intent, you should begin the lease negotiation phase from a position of relative strength.  However, even when the letter of intent is fully maximized, there’s still a lot to negotiate in the lease.

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part V: Negotiating the Letter of Intent

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part V: Negotiating the Letter of Intent

The letter of intent (“LOI”) is a non-binding document (although in unique circumstances they can be binding) which captures the terms and conditions upon which the parties have agreed and becomes the basis for a legally binding document (the lease).  The best LOIs are highly detailed and cover a wide range of topics from rental economics to flexibility mechanisms (like expansion, contraction, termination, and extension options) to operating expense inclusions and exclusions, and much more.  The occupier’s ability to include more items in the letter of intent varies somewhat by the circumstances of the market.  In tight markets like San Francisco circa 2019, landlords could get away with limiting the level of detail covered in the LOI.  Why would a landlord want to limit the LOI in this manner?  Because they gain leverage.  Most tenants don’t enter into the lease negotiation until late in their market process, meaning they’ve burned through a lot of the project schedule and will soon need to transition to design and construction in order to get the space ready on time.  In short, limiting the terms of the LOI is a way for the landlord to jam the tenant on timing, forcing them to be more conciliatory to preserve schedule.  In this current environment, nearly all tenants can enjoy the benefits of expanding the content of the LOI. 

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part IV: Implementing an Effective Market Process

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part IV: Implementing an Effective Market Process

You’ve identified the purpose behind your physical space needs, you’ve created a thorough project budget and schedule, and you’ve developed the right strategy.  It’s now time to implement a market process. 
 
What is “…a market process”?  In the context of office leasing, market process is how you engage the market.  It ties to your strategy, with sensitivity to the objectives you seek to accomplish.  The market is where you implement your strategy, where you take it from theory to reality. 

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part III: The Right Strategy

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part III: The Right Strategy

Once you’ve established the purpose of your physical workspace, and given careful thought to budget and schedule, it’s time to develop the right strategy. This is a vital step prior to market engagement. Good strategy is not always obvious.  At a minimum, any effective real estate strategy will include simultaneous assessment of multiple deal scenarios. Why would this matter? For starters, negotiation outcomes are not known.  At the beginning of the process, the favored outcome may be to stay in the existing space. However, as the process evolves over multiple rounds of negotiation, we often find that things change in ways that may cause the desired outcome to shift. For example, when the existing landlord offers terms that are materially less favorable than those achievable through relocation. 

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part II: Budget and Schedule

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part II: Budget and Schedule

Last week we established the importance of defining “the purpose” behind your workplace, especially those elements of the workplace which are expressed through physical spaces.  This is the first (and vitally important) step companies must take before they begin a real estate process (e.g., the process of acquiring space).  Once established, the next step is to think carefully about budget and schedule.  These considerations, much like the discussion of purpose, are greatly aided by working closely with your real estate advisor.  Here, again, companies must shift how they think about the engagement of real estate advisory services.  Having the right real estate partner on board from the very beginning facilitates access to critical data and insights.  The process of properly defining the budget and schedule are both areas in which the advisor can play a key role. 

, ,

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part I: The Purpose

, ,
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part I: The Purpose

In the years leading up to the pandemic, most medium and small companies defined their office space need based on headcount (current and projected), space programming, and industry/sector norms.  The exercise was mostly formulaic.  The primary differences in the offices of a small, regional law firm compared to those of an AM Law 100 firm would be scale, the cost of finishes, and the quality of the building and views.  It was planning for the same outcome, just at different levels on the cost spectrum.  Companies having a larger portfolio of offices would typically create a “workplace strategy” that included guidelines around programming (e.g., space layout, office size, critical adjacencies, growth factor, finishes, FF&E, etc.).  These guidelines could then be used to inform the real estate process across geography.